In this article, I’ll explain my neutral stance on GameStop’s (NYSE:GME) stock and why I’m skeptical about the company’s potential to turn its business around from survival mode to something sustainable.
The video game retailer’s shares have rallied strongly again as a meme stock following “Roaring Kitty’s” return to social media and his significant bet on the company. GME’s management capitalized on high volatility, raising billions through equity sales to strengthen its balance sheet and potentially turn around its core business.
However, GameStop remains a meme stock, trading at a valuation disconnected from its fundamentals, squeezing short sellers in the process. This makes the stock more of a gamble than an investment, rendering it incredibly risky to take either a long or short position.
The “Roaring Kitty” Effect
Since 2020, GameStop has been trading like a meme stock, and one of the big reasons behind this is a central character called Keith Gill.
Better known as “Roaring Kitty,” Gill is an ordinary trader who became well known between 2020 and 2021 for spreading his unconventional investment thesis on GameStop stock, which was being heavily shorted at the time, via his YouTube channel. His digital influence led hundreds of thousands of retail investors and traders to bet on the company, resulting in massive short squeezes and triggering the so-called “meme frenzy,” where, in addition to GME, several other heavily shorted stocks had sudden upticks in their trading performance as retail investors squeezed short sellers.
After these episodes culminated in legal proceedings, Keith Gill had to testify before a jury, asserting no involvement in the alleged manipulation of GameStop’s trading performance. He was subsequently cleared of any wrongdoing and has remained absent from social media since 2021. Since then, GameStop’s stock trading performance has lost ground, experiencing a drawdown of about 85% until early this year.
In May of this year, Roaring Kitty returned to social media. Posting memes on X, he once again aroused a sentiment in retail investors to a degree not seen since 2021, and GameStop shares once again jumped triple digits in a few trading sessions.
Keith Gill’s return showed that he was not only back but also betting on GameStop stock again and betting big. Roaring Kitty updated his portfolio, disclosing holdings of over five million GameStop shares, 120,000 call options, and $29 million in cash, totaling approximately $210 million in assets. Later, he exercised his call options, increasing his stake to about nine million shares, while his cash position sits at around $6 million.
GameStop Has a Lot of Cash Now
Despite all of the buzz around the stock in the past few years, GameStop’s business fundamentals haven’t changed much. The company’s sales kept declining due to the shift towards digital gaming and increased spending on e-commerce, which further squeezed demand for brick-and-mortar retail. The executive’s turnaround has continued to be a problem, although Ryan Cohen — the company’s largest shareholder — stepped in as a Chairman of the board (and later CEO) and established a sense of ownership that hadn’t existed before.
Today, GameStop continues to have demand problems. However, the issue of possible illiquidity that haunted the company in the past has been put behind. That’s because management (heavily influenced by Cohen) decided to take advantage of the hot demand for the stock with a massive equity offering that raised about $1.67 billion in 2021.
With this cash infusion, GameStop practically paid off all its debts and managed to reach a cash position of about $1 billion for a while, albeit with its core business revenues shrinking every year. Instead of using this cash position to invest in turning the company’s business around and returning to growing (or at least stabilizing) revenues, GameStop has executed a drastic cost-cutting strategy, which has been successful. Fiscal 2024 (which ended January 2024) was the first time since Fiscal 2018 that the company didn’t report a yearly net loss.
But it seems that with the return of Roaring Kitty to the scene, big fortunes came for GameStop once again. With the sudden appreciation of the company’s share price in May, GameStop sold 45 million shares and raised $933 million in cash. And it didn’t stop there.
On June 7, again after another massive surge, GameStop sold another 75 million shares, raising another $2.1 billion. Doing the math and incorporating this into the company’s cash balance, GameStop has approximately $4 billion on its balance sheet with virtually no debt.
What’s Next for GameStop?
According to the company’s management, the money raised from the equity offering will be used for general corporate purposes, which may include investments and acquisitions. In Q3 of last year, the company announced a change in its investment policy. Previously, it only allowed investments in fixed income, but now it permits investments in other types of equities under the guidance of Ryan Cohen and some of the board members.
Although the company’s management has provided little clarity on future plans, it is likely that GameStop will follow this path to diversify its business beyond brick-and-mortar stores, potentially investing in other businesses and becoming a kind of holding company.
However, this strategy, which is somewhat ambiguous and carries significant execution risk, embodies GameStop’s current investment thesis—a wager on the capability of its management.
Is GME Stock a Buy, According to Analysts?
According to Wall Street analyst Michael Pachter from Wedbush, who is the only analyst continuing to cover GameStop stock after it started trading like a meme stock, no one in the markets sees the company as a traditional investment but rather as a “momentum play.” He points out that volatility has been exceptionally high and attributes the recent equity sales by GameStop’s management to its significant overvaluation.
Pachter, who has held a bearish outlook on GME for an extended period, maintains his Sell rating on the stock, with an $11 price target, implying 61.7% downside potential.
The Bottom Line
Since becoming a meme stock, GameStop has shifted from an investment thesis to a gamble driven by investor sentiment rather than fundamentals.
Despite a recently strengthened balance sheet and engaged management, there is no clear plan for a fundamental turnaround. The attraction is purely momentum-based.
Trading on such momentum is risky, given the lack of correlation with fundamentals, making both long and short positions highly speculative. Therefore, I maintain a neutral stance on GameStop shares.
